Last week the Government Accountability Office (GAO) issued its second report this month about the Postal Service. This one is about post office closings (GAO-12-433), and it’s apparently intended to give lawmakers information that will help them craft postal legislation.

The cover letter for the report is addressed to Senator Tom Carper and Representative Darrell Issa, the two lawmakers leading postal reform. Presumably they’re the ones who requested it. They certainly knew where to go for evidence supporting their radical downsizing plans.

Like the report on the processing network that came out earlier in the month (which is discussed here), the post office report is written by Lorelei St. James, but it’s based on previous GAO reports written by Phillip Herr, whose theme has been consistent: The Postal Service is going broke and it needs expanded authority to downsize.

The new GAO report doesn’t make any additional recommendations, but the title gives you an idea of where it's headed: “Challenges Related to Restructuring the Postal Service’s Retail Network.”

The report is clearly designed to support the thesis that the retail network needs to be radically restructured and thousands of post offices need to close. To make its case, the GAO doesn’t hesitate to spin the facts. Here are just a few examples.

Visits to the post office are down by 16%

The report says that visits to the post office have decreased by 16% over the past five years. A table shows where the 16% comes from: In 2007, there were 1.22 billion visits, and in 2011, there were 1.02 billion.

But how did the Postal Service come up with these numbers? A footnote tells us: “USPS does not track retail transactions and customer visits at all facilities. Therefore, USPS uses an extrapolation to determine the transaction and customer visit information for all USPS-operated retail locations.”

In other words, the numbers are just a guess. No one is counting how many times people go to the post office to check their p.o. box, pick up a flat-rate box, ask a postal worker a question, and so on.

The Postal Service does have a way of estimating visits to the post office, however, and the numbers are much different than those cited in the GAO report. Every year, the Postal Service conducts something called the “Household Diary Survey” (HDS), in which 8,500 families are surveyed over the telephone or Internet about their postal habits, including how often they go to the post office every month. Here are the results for 2006 to 2010 (the 2011 report isn’t out yet):

2006

2007

2008

2009

2010

1-2 visits/month

44%

48%

34%

34%

31%

3-6 visits/month

29%

26%

30%

30%

33%

7+ visits/month

12%

9%

18%

18%

19%

Total (at least one visit per month)

85

83%

82%

82%

83%

Average

3.165

2.79

3.66

3.66

3.85

As the table shows, the average number of visits has been fairly steady, and just comparing 2010 to 2006, the number of people visiting the post office at least three times a month has increased significantly. (The averages were calculated using 1.5 visits a month; 4.5 visits; and 10 visits, for the three categories. That's conservative for the most frequent category, if you consider that people with post office boxes go to the post office almost every day.) You can see the trend lines in this chart:

As the chart shows, the number of households visiting the post office at least once a month has remained stable (about 82%), but the percentage of those that visit more frequently — 3 to 6 times a month and 7 or more times — has increased fairly steadily over the past five years. As the 2010 Household Diary report concludes: “Even with the continued availability of mail-related products and services through alternative modes (such as Internet orders), in-person visits to postal facilities remain stable.”

As for how many people visit the post office each year, the GAO report puts the figure at about one billion visits a year. The Household Diary tells a different story. There are 115 million households in the U.S. If each household visited the post office an average of 3.85 times a month in 2010, it comes to 5.3 billion visits a year. That’s five times the Postal Service’s estimate in the GAO report.

The Postal Service doesn’t really know how many people visit the post office each year, and there's little foundation for the claim that visits are down 16%.

80% of post offices lose money

The report says that 80% of the Postal Service’s retail facilities do not generate sufficient revenue to cover their costs. The GAO does not explain how the Postal Service calculates revenues and costs or how it came up with this number.

The GAO does not mention, for example, that the Postal Service only considers “walk-in” revenues that a post office brings in through stamp sales and other products. When it issues a Final Determination to close a post office, for example, the Postal Service frequently under-reports revenues. This has been a frequent topic in the opinions issued by PRC Chairman Ruth Goldway and Vice-Chairman Nanci Langley. Both have criticized the Postal Service for not providing a complete picture of revenues.

Consider this too: most large mailers enter their mail at Bulk Mail Entry Units (BMEUs), and the post offices across the country that handle this mail don’t get any revenue credit for it.

As for operating costs, it’s not easy to say how much it costs to run a post office because a lot of the work that goes on inside isn’t retail per se — like sorting and handling work — and there’s no easy way to separate the costs. For that reason, the Postal Service can’t even say how much it costs to operate its retail network. One outside expert put the cost at $4.5 billion, and other experts, at $5.8 billion (PRC Advisory Opinion, p. 83).

Another problem is that the Postal Service doesn’t consider lost revenue when a post office closes. It just assumes all of the revenue will enter the Postal Service another way — another post office, online, or a retail partner like CVS — but that’s obviously not the way all customers react to losing their post office.

So, the notion that 80% of post offices lose money is really a matter of postal bookkeeping methods, not a comment on whether or not a post office is a viable retail operation.

The deficit is $25 billion, and losses in 2012 will reach $14.1 billion

The GAO report focuses on the revenue and volume declines over the past five years. Volume is down by 21%, the deficit has climbed to $25 billion, and the Postal Service projects a $14.1 billion net loss for fiscal year 2012. News reports repeat these numbers without the slightest interest in questioning them.

The $25 billion deficit was caused almost entirely by the $5.6 billion in payments to the retiree health care fund. Over the past five years, the Postal Service has actually just about broken even. Here’s a table showing the financial picture over the past few years (the numbers come from the USPS 10K reports, available here):

$ in Billions

2007

2008

2009

2010

2011

Total 2007-2011

Revenue

74.8

74.9

68.1

67.1

65.7

350.6

Operating costs

80.1

77.7

71.8

75.4

70.6

375.6

Profit (Loss)

-5.3

-2.8

-3.7

-8.3

-4.9

-25.0

Health care payments

8.4

5.6

1.4

5.5

0.0

20.9

Adjusted profit/ Losses

3.1

2.8

-2.3

-2.8

-4.9

-4.1

As the table shows, were it not for the health care payments, the net loss for these five years would have been about $4 billion — a far cry from the $25 billion we keep hearing about.

As the table also shows, revenues took a big hit starting in 2009, when the effects of the recession began to be felt. The GAO report does not mention the word “recession” even once.

The projected loss of $14.1 billion for 2012 is even more disingenuous. As the year-to-date fiscal report for February 2012 shows, during the first five months of the year, revenues were $28.26 billion and expenses were 28.31 billion, for a net loss of only $44 million (0.15% of expenses). That’s basically breaking even.

But the Postal Service says it lost $5.67 billion during this period because it needs to make double payments to the retiree health care fund, since it skipped the payments in 2011. The $14.1 billion projected loss for 2012 thus includes 12.2 billion in health care payments. The actual operating loss will probably be about $2 billion, perhaps less — the first five months of FY2011 are about 2.2% better than projections.

In other words, citing figures like a $25 billion loss for the past five years and a $14 billion loss for 2012 is just a scare tactic. It’s designed to grab headlines, and it shows a callous disregard for what’s really going on in the Postal Service’s finances.

Post offices closed because of postmaster vacancies and expiring leases

The GAO report states that 631 post offices have been closed over the past five years. Of these, 131 were the result of the 2009 Stations and Branches Optimization & Consolidation Initiative (SBOC), and the other 500 were the result of reviews initiated in the field, on “an individual, ad-hoc basis.” The report says that these 500 closures were “in response to a postmaster vacancy or the suspension of operations due to an expired lease or irreparable damage to the facility following a natural disaster.”

That’s a somewhat misleading picture of post office closings. First of all, most of the 630 closings happened in just the past year. According to Postmaster Finder, 246 post offices closed in 2007 to 2010; according to a list the Postal Service gave the PRC in February, 430 post offices were closed in 2011. The pace of closings has thus accelerated over the past year to an unprecedented level.

As for the causes of the closings, in nearly all cases over the past year, the Postal Service identified a number of reasons. That’s because it is against the law to close a post office “solely” for operating at a deficit. The Postal Service is therefore required to come up with other reasons.

A postmaster vacancy has been a common reason. That works out nicely. Years ago, the Postal Service stopped replacing postmasters when they retired or left the Service. As we learn in the GAO report, there are now 23,426 postmasters and 32,196 post offices. That's eight thousand post offices without a postmaster — prime targets for closure.

As residents of communities without a postmaster point out, it’s very unfair to identify a postmaster vacancy as a reason for closing the post office, considering that the Postal Service chose not to replace the postmaster.

As for expired leases, the Postal Service often creates that cause for closure as well. When a lease is expiring, the Postal Service tends to make demands on the lessor — reducing the rent, including an early-termination clause, shifting maintenance costs to the lessor, etc. — that often lead to a breakdown in the negotiations. The Postal Service then declares an “emergency suspension,” and closes the post office. Months, even years later, it finally gets around to a formal discontinuance process. The practice of using lease issues to close post offices prompted a PRC investigation, but the problem continues, and the USPS OIG is currently looking at the Postal Service’s contract with CBRE, the real estate firm negotiating leases.

As for natural disasters, post offices are commonly closed for a short period of time due to a flood or similar problem, but not that many end up closing permanently for such reasons.

The GAO report is thus misleading when it attributes post office closings to postmaster vacancies, lease expirations, or natural disasters. The Postal Service closed about 430 post offices in 2011, and it issued Final Determination notices to another two or three hundred, which will close when the moratorium ends in May. The total cost savings for these 700 or so post office closings will come to maybe $35 million. It’s not even a drop in the bucket, but that’s why they closed — not because of postmaster vacancies or expiring leases.

Contract units can optimize the retail network

The GAO report notes that one of the cost-saving initiatives being discussed is “optimizing the retail network by reducing the number of USPS-operated facilities and increasing the number of lower-cost, alternative retail options, such as self-service kiosks and partnerships with retailers.”

It’s no surprise that a kiosk would cost less to operate than a post office, but is that really important? Do banks close their offices because there are ATM machines?

As for alternative retail options, that refers to the tens of thousands big-box stores, pharmacies, and supermarkets where you can now buy stamps and sometimes send a flat-rate box. Though sometimes helpfully convenient, these are clearly not satisfactory alternatives to a post office.

The report notes as one example of these alternative retail options the “contract postal unit” (CPU). That's when the Postal Service contracts with a private business, like a convenience store, authorizing it to do some postal business. The arrangement saves the Postal Service the expense of a postal worker salary, and it gives the business an opportunity to make a little extra money. There’s a table in the report that shows how many CPUs the Postal Service there are: In 2011, there were 3,586; in 2007, there were 4,026 of them. That represents a decline of 11%.

Even that number fails to get at the true picture. During fiscal year 2011, the Postal Service opened 144 contract postal units, but it closed 259 of them. For every one that opened, nearly two closed.

If contract units were a truly viable alternative to traditional post offices, why are their numbers declining? There are many reasons: The Postal Service has difficulty doing proper oversight since there’s no USPS personnel on the premises, and it’s sometimes a problem even collecting the money that the vendor owes the Postal Service. Sometimes the private business chooses to terminate its contract with the Postal Service because the amount of postal revenue being generated isn’t worth the effort required by all the USPS paperwork.

In a footnote, the GAO notes the latest innovation in retail options, the Village Post Office. That’s kind of a stripped-down CPU (they offer fewer services than a regular CPU), but with a quainter name. The GAO fails to mention that the VPO idea has been a total flop. Since August, when the grand new concept was unveiled, about eleven have opened. That’s a little more than one a month. At that rate, opening a couple of thousand VPOs — as the Postal Service intended to do when it announced the idea — would take 120 years.

Overall, then, CPUs and VPOs are not going to replace post offices, and it makes little sense to mention them as a viable alternative. It’s just a way of making it seem that closing post offices is no big deal. If contract units were a realistic option, the Postal Service would have created thousands more of them by now. It’s not happening.

Retail “optimization” can save $2 billion

The report notes that the Postal Service’s five-year plan, which aims to save $22 billion a year, includes $2 billion a year in savings from “optimizing” the retail network. But it’s almost impossible to find anything in the Postal Service’s plans and reports about where this savings will come from. The Postal Service has been consistently vague and elusive about the cost savings associated with closing post offices.

For example, when the Postal Service proposed the Retail Access Optimization Initiative (RAOI) to close 3,650 post offices last summer, it would not tell the Postal Regulatory Commission how much it expected to save. A USPS spokesperson told the media that the Postal Service would save $200 million, but that number didn’t hold up under scrutiny.

When it issued its Advisory Opinion, the PRC concluded that it could not develop a reasonable estimate of the financial impact of the initiative because USPS did not collect facility-specific revenue and cost data or separate retail costs from other operational costs. The PRC did its own estimate based on all the appeals it had reviewed, and came up with $100 million — half the original Postal Service estimate.

The GAO report notes that the Postal Service has closed 631 post offices over the past five years, but the GAO did not know how much the closings saved. As the report notes, the Postal Service “did not have cost savings estimates related to these closures.”

Actually, the Postal Service did have those estimates, since it’s required to include them in all Final Determination notices when it closes a post office. But apparently the Postal Service did not want to make those numbers available to the GAO.

The GAO report also notes that the Postal Service’s five-year plan will involve a workforce reduction of 155,000, but “the plan did not indicate how many of these proposed employee reductions would occur as a result of changes to its retail network.”

Overall, then, the Postal Service is not very interested in providing a lot of details about how retail optimization will save $2 billion or how closing post offices will save very much at all. But we can do some estimating.

As noted above, the total cost of operating the retail network is on the order of $4.5 to $5.8 billion. Saving $2 billion would mean dismantling more than a third, almost a half, of the network. Here's how that might break down.

The GAO has a table that shows that in 2007, there were 25,285 postmasters and 41,086 retail clerks; in 2011, there were 23,426 postmasters and 30,393 clerks. That represents a workforce reduction of 12,552. The Postal Service says workforce reductions in the retail network saved $800 million. At that rate, saving $2 billion would require a reduction of 31,000 positions — well over half the retail workforce.

Closing a small post office saves between $30,000 and $60,000 a year (depending on whether you use the PRC or USPS numbers). Closing 12,000 would save between $360 million and $720 million.

Closing larger post offices saves more, but it’s more problematic because they serve a lot of customers and bring in a lot of revenue. But the Postal Service may choose to close thousands of stations and branches, as it started to do back in 2009. An audit report on the Stations & Branches initiative indicates that closing a typical station or branch saves about $180,000 a year, so closing 3,000 of them would save about $540 million.

Saving $2 billion would mean not only closing all those post offices but also reducing the workforce by 25,000 or 30,000 jobs. Not all of those jobs would be employees at the post offices that close. The retail staffs at the remaining open post offices would also need to be cut significantly. Talk about long lines.

You can see why the Postal Service doesn’t like to say much about the cost savings from closing post offices and optimizing the retail network.

Overall, the GAO report is filled with all sorts of misinformation like this. As the report’s title reminds us, there are indeed many “Challenges Related to Restructuring the Postal Service’s Retail Network.”

One of those “challenges” is the simple fact that significant savings would require not just “restructuring” but virtually dismantling the nation’s network of post offices. The GAO skirts the issue, however, which is kind of strange for a report that’s supposed to be all about post office closings. With reports like this guiding the way, it's no wonder that Congress will probably make matters worse with its postal reform legislation.